Quote Originally Posted by Rucker61 View Post
Corporations pay taxes on the profits they show at the end of the year. Those profits can either be retained by the company or distributed to stockholders, or a mix thereof. The dividends distributed to shareholders are then taxed on the individual as short or long term capital gains.

Example:

Acme Corporation has revenues of $10M at the end of the year (that's a lot of anvils). After all the accounting is done, they show $500k in profit. They pay taxes on that profit, say 30%, leaving them net earnings after taxes of $350k.

They decide to pay a dividend of $1 per share, with 100k shares outstanding. They send out $100,000 in cash to the shareholders. The sole long term stockholder, R. Runner, will then pay capital gains tax of 15% on that $100k income.

That's where the double taxation comes from. What am I missing? Dividends do not count as expenses and cannot be use as a deduction to income to reduce taxable income. That's why most profit is held as retained earnings rather than dispursed to the shareholders, as a tax avoidance.
Dividends are disbursed as pre-taxable income, unless the corporation has some specific reason for doing so (a more favorable tax advantage) NEVER as post tax income. Thats what your missing.

Actually I am wrong, dividends are taxed as Corporate profits the disbursed. I will have to suck it up and go ask my wife how the shareholders are paid pre-tax, as I have screwed up my understanding somewhere.